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Asia Steel - 3Q 2010
Asia Steel - 3Q 2010
Asia Steel - 3Q 2010
View HSBC Global Research at: http://www.research.hsbc.com Catalysts — steel prices to bottom. We believe the key near-
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, term catalyst is a bottoming in steel prices. Upcoming 2Q
and is not registered/qualified pursuant to FINRA regulations
earnings should be solid but this is largely priced in; 3Q outlook
Issuer of report: The Hongkong and Shanghai Banking
Corporation Limited statements will likely be cautious given recent price cuts. This
should prove to be the bottom as we expect recovery in steel
Disclaimer & Disclosures prices in 4Q as cost pressures ease.
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it
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3Q to signal bottom
Sentiment to improve on 3Q output cuts and prices stabilise
3Q margin squeeze under way, reduce sector EPS by 5%
Sector correction overdone — reiterate OW stance on Asia Steel
The Asian Steel sector has been a major casualty notwithstanding lower iron ore and coal prices in
of market risk aversion in 1H10. Stocks under our recent months, the current quarterly contract
coverage have fallen by 25% ytd on average (China pricing system (based on three-month spot lag)
stocks faring worse, down 40%). While sentiment suggests an increase in 3Q raw material contract
may remain weak in the near term, we believe steel prices. Combined with the traditional 3Q weaker
prices may soon bottom given prices are now below demand season approaching, we lower sector EPS
costs, which should trigger increasing production by an average of 13% in 2010, placing us 7%
cuts. We stick to our medium-term view that Asia below consensus estimates.
should remain tightly balanced, shift into a net
That said, we believe 3Q will mark the bottom for
importer position and operate at near full capacity.
profits as prices are now below cash costs of
With valuations now below trend levels and
production which has triggered production cuts. We
replacement costs, we reiterate our bullish stance
believe inventories remain at normal levels. In
on Asia Steel.
addition, whilst seasonality will impact 3Q demand,
HSBC Asia Steel coverage ytd price performance it should also assist demand recovery in 4Q.
JSW Steel 5%
China Steel -7% With current valuations implying below trend
SAIL -16% ROE in addition to replacement costs, we believe
NSC -17%
Tata Steel -21% the sector has been oversold. Within our coverage
JFE -22% universe, POSCO continues to rank best in our
POSCO -24%
sector scorecard.
Bluescope -27%
Maanshan A -31%
Baosteel -37%
Maanshan H -38%
Angang H -42%
-52%
Angang A
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Supply cuts under way production cuts from the small mills in the near term
as they continue to make losses at current prices.
With current domestic Chinese HRC spot prices at
According to China Securities Journal rolling mills
RMB4,200, we believe the majority of Chinese
in northern China are estimated to be running at less
capacity is now operating in losses. This should
than 50% of capacity.
trigger supply cuts from producers, which we
believe is under way. According to World Steel China marginal producers profitability at spot steel and raw
material prices (ex-VAT)
Dynamics (WSD), average HRC production cash
RMB/t
cost in China (with VAT) is RMB4,250/t.
Iron ore 1,627
China average HRC production cost (RMB/t) Coking coal 942
Rolling 1,000
RMB/t Transport 135
Cost 3,704
Iron ore 1,775
HRC price 3,573
Coking coal 704
Profit/ (loss) -132
Scrap 205
Energy 591 Source: HSBC, SBB, Bloomberg
Labour 184
Freight 327
Others 464 Further, with the weakness in steel prices but still
Total 4,250
high raw material contract prices we believe the
Source: World Steel Dynamics
larger steel mills will face margin squeeze in 3Q
and will be forced to reduce output. Baosteel
A slowdown in production rate is already evident in
Chairman Xu Lejiang has been quoted by Metal
China’s May crude steel production numbers. Crude
Bulletin saying that “Chinese steelmakers will cut
steel output in China slowed down to 1.81mtpd in
production or bring forward maintenance in 3Q on
May from the record 1.85mtpd run-rate achieved in
weak demand”.
April 2010. According to CISA production rates
continued to slow down from 1.85mtpd in the first Steel traders in China expect large producers to start
10 days to 1.80mtpd in the next 10 days and further maintenance from July as the mills cannot afford to
to 1.78mtpd in the last 10 days of May. bear high costs during a seasonally weak 3Q.
China average daily crude steel production rates (mtpd)
Furthermore, they note that producers have not yet
started to cut output as traders now bear the losses
1.90
instead of producers. However, if spot market prices
1.80
continue to fall, steelmakers will have to refund
1.70
traders in the end and will have to bear the loss
1.60
which will force them to cut output.
1.50
According to WSD, average HRC production cash
1.40
cost in the World ex-China is USD647/t. With
1.30
current Asian HRC spot prices at cUSD625/t
Oct-09
Dec-09
Jan-09
Feb-09
Mar-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Jan-10
Feb-10
Mar-10
Apr-10
May-09
Nov-09
May-10
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World exChina average HRC production cost (USD/t) This corresponds to the demand for finished steel
USD/t where it has grown by an average 14% in 2Q over
Iron ore 205 2006-09. Based on the demand run rate in April-
Coking coal 114
Scrap 56 May we estimate sequential finished steel
Energy 76 consumption growth of 10% in 2Q.
Labour 68
Freight 60
Others 68 Average q-o-q growth for end user and apparent crude steel
Total 647 consumption in 2006-09 vs 2010
capacity of 3.2mtpa in Pohang during July- Source: HSBC estimates, CEIC, *Note: 2Q10 is estimated based on Apr-May run rate
Mar-10
Apr-10
May-10
Jun-10
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USD/t
property clampdown and the European crisis have 1,000
been overplayed. 800
600
As detailed in our China Metals & Mining Monitor – 400
Property crackdown in focus dated 6 May 2010 we
May-05
May-08
May-09
May-03
May-04
May-06
May-07
May-10
believe there is little evidence thus far to suggest that
property sector demand has slowed in China. Year to Average USD950/t Spot USD931/t
May, domestic construction completions were up
Source: Bloomberg
18% yoy while construction starts were up 72% yoy.
Given the 18-24-month construction period for Asia Steel companies EV/t of capacity
typical projects, we believe underlying construction
EV/t of Capacity (USD/t)
demand will remain firm (albeit slowing). The
POSCO 826
government’s roll-out of affordable housing should Nippon Steel 1155
JFE Holdings 1040
also provide some offset to lower private investment. Baosteel 794
Angang - A 641
With respect to Europe, as detailed in our China Angang - H 641
Maanshan - A 335
Metals & Mining Monitor – From overheating to Maanshan - H 335
slowdown fears dated 4 June, we see that Europe China Steel 1096
SAIL 1134
only accounted for 14% of 2009 global steel Tata Steel 689
JSW Steel 1098
demand compared to China’s 46%. We do not Bluescope 634
believe a European slowdown will have a major Average 931
Source: HSBC
impact on global steel consumption. Our scenario
analysis suggests that if European demand growth
New capacity costs
falls flat versus our base case of 24% in 2010,
Company Project Country Project Capacity Capex Capex/t
then this will reduce our global demand forecast Type (mtpa) (USDbn) (USD)
by just 3% to 1.23bt. China Steel Dragon steel Taiwan Greenfield 2.5 2.8 1,139
BF #2
China Steel Dragon steel Taiwan Greenfield 2.5 2.5 1,000
Valuations below replacement costs BF #1
Angang Bayuquan China Greenfield 5.0 4.2 848
Valuations (EV/t) for the stocks under our Hyundai Steel BF #1 and #2 Korea Greenfield 4.0 4.7 1,168
Baosteel Zhanjiang China Brownfield 5.0 5.1 1,026
coverage have fallen by an average 22% from the Average 1,036
current year peak of USD1,200/t in January to Source: HSBC
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What’s in the price? HSBC Steel target prices and ratings – 16 June 2010
POSCO NSC JFE Baosteel Angang Maanshan CSC SAIL TATA JSW BSL
Assumptions
- Risk free rate 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 5.0%
- Market risk premium 6.5% 3.5% 3.5% 6.0% 6.0% 6.0% 5.5% 6.5% 6.5% 6.5% 4.5%
- Beta 1.3 1.2 1.3 1.1 1.3 1.3 1.0 1.2 1.3 1.3 1.2
CoE 12% 8% 9% 11% 12% 12% 10% 12% 13% 12% 11%
Long term growth 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Current price 472,000 318 2,986 6.13 9.91 3.53 30.70 198 486 1,057 2.35
Currency KRW JPY JPY RMB HKD HKD TWD INR INR INR AUD
Financial year for book value Dec-10 Mar-11 Mar-11 Dec-10 Dec-10 Dec-10 Dec-10 Mar-12 Mar-12 Mar-12 Jun-11
BV/share 460,000 300 2,931 5.55 8.85 4.24 20.8 115 457 694 3.27
Current PB 1.0 1.1 1.0 1.1 1.1 0.8 1.5 1.7 1.1 1.5 0.7
Implied ROE 12% 9% 9% 12% 14% 10% 14% 21% 13% 19% 8%
Historical ROE (2002-08) 15% 11% 15% 15% 15% 12% 19% 40% 33% 21% 16%
Forecast ROE (2010-12) 16% 10% 12% 11% 12% 13% 17% 21% 17% 21% 8%
Long-term sustainable ROE 16% 10% 10% 15% 15% 13% 17% 25% 15% 24% 10%
Target PB 1.3 1.2 1.2 1.4 1.3 1.1 1.8 2.1 1.2 1.9 0.9
Price (derived) 598,000 361 3,370 7.76 11.33 4.45 37.48 243 548 1318 2.94
HSBC target 600,000 360 3,350 8.00 12.00 4.50 37.00 256 562 1280 3.00
Upside / (downside) 27.1% 13.2% 12.2% 30.5% 21.1% 27.5% 20.5% 29.3% 15.7% 21.1% 27.7%
Div yield 2.7% 1.3% 2.4% 3.3% 3.5% 3.6% 8.1% 1.5% 1.4% 1.3% 1.7%
Potential return 29.8% 14.5% 14.6% 33.8% 24.5% 31.0% 28.7% 30.8% 17.1% 22.4% 29.4%
Neutral band +0.5 to 20.5 -2.5 to 17.5 -2.5 to 17.5 +0.0 to 20.0 +0.0 to 20.0 +0.0 to 20.0 -0.5 to 19.5 +0.5 to 20.5 +0.5 to 20.5 +0.5 to 20.5 -0.5 to 19.5
HSBC rating OW (V) N (V) N (V) OW (V) OW (V) OW (V) OW (V) OW (V) N (V) OW (V) OW (V)
Previous rating OW (V) N (V) N (V) OW (V) OW (V) OW (V) OW (V) OW (V) N (V) OW (V) OW (V)
Previous target 650,000 360 3,600 9.00 15.00 6.00 42.00 272 690 1460 3.50
Previous ROE assumptions 17% 10% 10% 17% 20% 16% 19% 25% 17% 24% 11%
Previous PB multiple 1.4 1.2 1.2 1.5 1.6 1.3 2.0 2.1 1.4 1.9 1.1
Source: HSBC estimates
Rank Stock Gearing Iron ore integration Profitability ROE / ROIC Valuation Overall score
20% 10% 20% 20% 30% 100%
1 Posco 2.0 4.0 4.0 2.5 1.7 2.6
2 SAIL 1.0 1.0 4.0 1.5 9.7 4.3
3 Maanshan 6.0 10.0 6.3 5.0 2.0 5.1
4 Bluescope 4.0 4.0 7.3 10.0 2.7 5.5
5 China Steel 3.0 9.0 6.7 3.0 8.3 5.9
6 Angang 8.0 8.0 6.3 7.0 5.0 6.6
7 Baosteel 5.0 10.0 7.0 7.0 6.3 6.7
8 JSW 11.0 6.0 3.0 3.5 9.0 6.8
9 Nippon 7.0 2.0 6.7 10.0 7.3 7.1
10 Tata Steel 10.0 3.0 6.0 8.0 7.7 7.4
11 JFE 9.0 7.0 8.7 8.5 6.3 7.8
Source: HSBC estimates
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Target Return to _________________ Net debt/equity __________________ _________________ EPS growth (%) _________________
price target 2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO KRW 600,000 29.8% 5% -2% -2% -9% -9% 21.6% -29.8% 55.4% 25.9% 19.2%
Nippon Steel JPY 360 14.5% 56% 57% 50% 45% 40% -41.7% -85.2% 253.9% 87.5% 17.2%
JFE Holdings JPY 3,350 14.6% 104% 102% 92% 80% 71% -18.4% -58.5% 71.8% 38.3% 6.9%
Baosteel RMB 8.00 33.8% 32% 25% 29% 21% 7% -49.2% -10.0% 56.1% 37.6% 3.2%
Angang - A RMB 9.50 26.3% 44% 57% 58% 46% 36% -63.1% -74.9% 472.3% 98.9% -1.2%
Angang - H HKD 12.00 24.5% 44% 57% 58% 46% 36% -63.1% -74.9% 472.3% 98.9% -1.2%
Maanshan - A RMB 4.50 33.2% 61% 55% 35% 21% 10% -70.3% -50.9% 522.9% 60.2% 50.3%
Maanshan - H HKD 4.50 31.0% 61% 55% 35% 21% 10% -70.3% -50.9% 522.9% 60.2% 50.3%
China Steel NTD 37.00 28.7% 28% 26% 16% 8% 2% -55.0% -24.1% 90.9% 30.2% 12.6%
SAIL INR 256 30.8% -37% -40% -25% -10% -24% -16.7% 5.5% 11.2% 28.2% 18.8%
Tata Steel INR 562 17.1% 174% 160% 141% 128% 92% -40.2% nm nm 83.8% 56.7%
JSW Steel INR 1,280 22.4% 231% 230% 192% 157% 137% -63.2% 105.6% 39.7% 44.8% 15.8%
BlueScope AUD 3.00 29.4% 29% 15% 15% 12% 10% 10.6% nm nm 157.0% -37.2%
Average 48% 44% 40% 34% 25% -26.2% -35.5% 128.9% 51.8% 16.7%
_______________ EBITDA margin (%) ________________ ________________ Dividend yield (%) ________________
2008 2009 2010e 2011e 2012e 2008 2009 2010e 2011e 2012e
POSCO 27.6% 19.3% 27.1% 28.1% 31.3% 2.0% 1.6% 2.9% 3.3% 3.8%
Nippon Steel 13.8% 10.3% 9.4% 10.2% 12.0% 2.2% 0.8% 1.2% 1.9% 2.1%
JFE Holdings 17.7% 13.4% 14.5% 14.9% 16.3% 2.9% 1.1% 1.9% 2.5% 2.6%
Baosteel 13.3% 16.6% 17.0% 17.0% 17.1% 2.6% 2.9% 2.9% 4.9% 5.1%
Angang - A 11.7% 11.3% 17.2% 20.6% 23.6% 2.2% 0.6% 4.5% 6.6% 7.3%
Angang - H 11.7% 11.3% 17.2% 20.6% 23.6% 2.0% 0.6% 4.1% 6.0% 6.6%
Maanshan - A 9.9% 12.2% 15.9% 16.0% 21.0% 0.0% 1.0% 4.1% 4.6% 6.9%
Maanshan - H 9.9% 12.2% 15.9% 16.0% 21.0% 0.0% 1.1% 4.5% 5.1% 7.6%
China Steel 17.3% 12.7% 23.5% 21.6% 27.2% 5.2% 4.2% 8.4% 9.3% 13.3%
SAIL 21.6% 25.2% 30.4% 31.4% 37.2% 1.5% 1.3% 1.3% 1.4% 1.4%
Tata Steel 12.8% 14.1% 14.8% 15.6% 21.6% 2.6% 1.1% 1.1% 2.3% 2.6%
JSW Steel 20.6% 21.4% 21.6% 23.9% 32.7% 0.3% 0.8% 1.2% 1.9% 3.7%
BlueScope 9.4% 5.6% 7.1% 9.0% 9.4% 11.1% 0.0% 3.8% 4.2% 5.7%
Average 18.0% 15.8% 19.5% 20.2% 23.5% 2.6% 1.6% 2.8% 3.6% 4.3%
Source: Company data, HSBC estimates
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Contents
3Q to signal bottom 3
Supply cuts under way 4
Company Summaries 17
POSCO (OW(V), TP KRW600,000) 18
Disclosure appendix 32
Disclaimer 35
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3Q margin squeeze –
prices down, costs up
Reduce 2010 steel price forecast by 5% to reflect weak spot
prices and poor market sentiment
China’s marginal steel capacity under losses at current prices; will
result in production cutback and provide pricing floor
Iron ore price set to increase in 3Q as flagged by the miners,
coking coal contract price increase 12% q-o-q
Lowering steel price forecast by 5% while Steel Business Briefing (SBB) reports that
POSCO is considering a quarterly price increase
We continue to believe that steel demand in the
to reflect higher raw material costs. At the same
region remains robust and expect regional markets to
time, China Steel Corp announced a price hike of
remain tight. However, given the macroeconomic
an average 6.6% for its July shipments.
concerns surrounding China’s overheating property
sector and the sovereign debt crisis in Europe, Since recent peaks in mid-April, HRC prices have
market sentiment has been hit hard, leading to a fallen 8.5% while Rebar has suffered a 12% fall.
negative flow-on effect for regional steel prices. As a However, we believe domestic steel prices in China
result, we cut our 2010 steel price estimates by 5% have reached stable support levels, with spot prices
to fully reflect this period of spot market weakness. below industry average costs of production.
HSBC 2010e steel price forecast changes We calculate current HRC production costs in
Old New Chg
China to be RMB3,704/t (ex VAT), based on spot
Asia (USD/t)
domestic iron ore and coking coal prices. Given
HRC 688 652 -5%
Rebar 649 612 -6% that spot HRC prices are RMB3,573/t (ex VAT),
China (USD/t) the average domestic commodity grade HRC
HRC 670 641 -4%
Rebar 650 610 -6%
producer is making a loss of RMB132/t. We
Source: CRU, HSBC estimates believe this provides a floor to HRC prices and
historically, prices have rebounded strongly after
Chinese mills under our coverage have already falling below cost of production levels.
announced a cut to their July contract price in the
range of 8-9%. Regional mills has been more
resilient: Nippon Steel recently secured a 25%
price hike for the April-September 2010 period
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China HRC production cost In order to test this pricing methodology, we use
RMB/t the Metal Bulletin/Bloomberg China Iron ore
Iron ore 1,627 fines price as our base index. Based on the
Coking coal 942
Rolling 1,000 guidelines, we calculate the Dec 09 to Feb 10
Transport 135 average price was USD129.80/t (on a 66% grade
Cost 3,704
HRC price 3,573 CFR basis). Taking the average Brazil-China
Profit/ (loss) -132
freight rate of USD30.11/t over the same period,
Source: HSBC, SBB, Bloomberg
we derive a VALE JunQ10 contract price of
USD99.69/t (on a FOB basis). This compares
China HRC prices and production cost
favourably to press reports (Bloomberg, Reuters)
5,300
in mid-April 2010 that suggested VALE agreed
4,800
on JunQ10 contract prices of cUSD100-110/t.
4,300
3,800 Metal Bulletin notes that while BHP and RIO
3,300
have not revealed their pricing formulae, it
2,800
2,300
believes that both companies use a pricing
mechanism based on the full preceding quarter.
Dec-07
Dec-09
Dec-08
Jun-07
Sep-07
Mar-08
Jun-08
Sep-08
Mar-09
Jun-09
Sep-09
Mar-10
Jun-10
VALE’s pricing methodology is more transparent VALE 105.00 146.16 132.51 39% -9%
BHP/RIO 120.00 157.44 139.54 31% -11%
as it uses the average prices index (chosen at the Note: Spot pricing is based on 14 June 2010.
Source: Bloomberg, Metal Bulletin, HSBC estimates
customer’s discretion) for the three-month period
directly proceeding the month before the quarter
in question. Therefore, JunQ10 contracts (for
April, May, June) are priced to the average of
index prices from 1 Dec 2009 to 28 Feb 2010.
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It can be seen that the indicative VALE and Pricing for quarterly coking coal
BHP/RIO SepQ10 prices represent a 39% and 31% The mechanisms surrounding coking coal pricing
q-o-q increase to the market speculated JunQ10 are just as, if not more, opaque as iron ore. The
contract prices. This is in line with the view amongst structural shift from an annual benchmark price
various regional steel companies (POSCO, Baosteel, has meant that JunQ10 pricing was agreed at
China Steel), who all concede that SepQ iron ore USD200/t, a 55% increase to the 2009 annual
pricing will most likely be higher than JunQ levels. pricing level of USD129/t. Recent media reports
The key issue will be the magnitude of a possible (Bloomberg, Reuters) suggest that BHP
quarterly increase. We believe there is a risk that Mitsubishi Alliance (BMA) are in negotiations
steel mills are unlikely to agree to provisional with major Japanese steel mills over SepQ10
contract pricing while it remains at a premium to coking coal price settlements, with indicative
spot prices. We note that spot market purchases are pricing being USD225/t (12.5% q-o-q increase).
currently at a c10% discount to like-for-like derived
SepQ10 pricing levels.
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HSBC regional steel price assumptions and changes from previous forecasts
____________________ Far East steel price (USD/t)______________________ __________________ Change from previous forecast____________________
Rebar Plate HRC CRC HDG Rebar Plate HRC CRC HDG
2009 500 513 490 585 648 0% 0% 0% 0% 0%
2010e 612 686 652 760 816 -6% -5% -5% -5% -4%
2011e 676 768 713 813 870 0% 0% 0% 0% 0%
2012e 635 720 670 769 829 0% 0% 0% 0% 0%
2013e 604 685 638 737 799 0% 0% 0% 0% 0%
_____________________ China steel price (USD/t)_______________________ __________________ Change from previous forecast____________________
Rebar Plate HRC CRC HDG Rebar Plate HRC CRC HDG
2009 525 527 528 654 654 0% 0% 0% 0% 0%
2010e 610 657 641 782 782 -6% -3% -4% -2% -2%
2011e 675 699 695 797 808 0% 0% 0% 0% 0%
2012e 648 677 668 778 787 0% 0% 0% 0% 0%
2013e 628 661 648 763 771 0% 0% 0% 0% 0%
Source: CRU, HSBC estimates
Asian Steel EBITDA sensitivity to USD10/t change in iron ore or coking coal price
Unit ______ Forecast EBITDA _______ ___ Coking coal sensitivity _____ ______Iron ore sensitivity ______
2010e 2011e 2010e 2011e 2010e 2011e
POSCO KRW bn 7,923 10,183 -4% -3% -9% -7%
Nippon steel JPY bn 431 548 -4% -4% -11% -9%
JFE JPY bn 505 538 -4% -3% -10% -9%
Baosteel RMB mn 31,230 36,574 -4% -4% -8% -8%
Angang RMB mn 13,499 19,393 -6% -4% -16% -11%
Maanshan RMB mn 9,357 11,150 -6% -6% -17% -15%
China Steel TWD mn 51,258 61,409 -5% -5% -11% -10%
SAIL INR mn 124,593 165,134 -3% -3% 0% 0%
Tata Steel INR mn 152,671 167,163 -5% -4% -13% -12%
JSW Steel INR mn 52,277 71,721 -4% -3% -10% -9%
BlueScope AUD mn 580 1,116 -16% -8% -13% -7%
Source: HSBC estimates; Note: base case iron ore +81% in 2010, -18% in 2011, coking coal +79% in 2010, +8% in 2011
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Company Summaries
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Notes
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Notes
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Notes
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Daniel Kang, Jatin Kotian, Sarah Mak and Lun Zhang
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
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Global Natural Resources
Asia Metals & Mining abc
18 June 2010
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 May 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 April 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 30 April 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 30 April 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
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Asia Metals & Mining abc
18 June 2010
Additional disclosures
1 This report is dated as at 18 June 2010.
2 All market data included in this report are dated as at close 16 June 2010, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 31 May 2010, HSBC beneficially owned 2% or more of a class of common equity securities of the following
company(ies) : TATA STEEL
5 As of 31 May 2010, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed
by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more
of the total capital of the subject companies securities in the market for the following Company(ies) : TATA STEEL ,
MAANSHAN IRON & STEEL , JSW STEEL LTD , ANGANG STEEL
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Global Natural Resources
Asia Metals & Mining abc
18 June 2010
Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation The Hongkong and Shanghai Banking
Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Corporation Limited
Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf;
000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; Level 19, 1 Queen’s Road Central
'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Hong Kong SAR
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Telephone: +852 2843 9111
Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Telex: 75100 CAPEL HX
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
Fax: +852 2596 0200
Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC
Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Website: www.research.hsbc.com
Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo
Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank
Argentina S.A., HSBC Saudi Arabia Limited.
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated
business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in
Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Securities and Futures Commission. All enquires by
recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to
the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as
an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained
from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts
no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are
subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned
in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its
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related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking
or underwriting services for or relating to those companies.
HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons
receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA)
Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report.
In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial
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general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289)
(“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication
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Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale”
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In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any
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© Copyright. The Hongkong and Shanghai Banking Corporation Limited 2010, ALL RIGHTS RESERVED. No part of this publication may be
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without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 177/08/2009
[270552]
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abc
Global Natural Resources & Energy
Research Team
Metals and Mining Alternative Energy
EMEA Robert Clover
Andrew Keen Global Sector Head, Alternative Energy
+44 20 7991 6764 andrew.keen@hsbcib.com +44 20 7991 6741 robert.clover@hsbcib.com
CEEMEA, Brazil
Anisa Redman
+44 20 7991 6822 anisa.redman@hsbcib.com
Asia Specialist Sales
Sonia Song, CFA Jacques Vaillancourt
+852 2996 6557 soniasong@hsbc.com.hk +44 20 7991 5210 jacques.vaillancourt@hsbcib.com
Duke Suttikulpanich Mark van Lonkhuyzen
+852 2996 6590 dukesuttikulpanich@hsbc.com.hk +44 20 7991 1329 mark.van.lonkhuyzen@hsbcib.com
Kumar Manish Billal Ismail
+91 22 2268 1238 kmanish@hsbc.co.in +44 20 7991 5362 billal.ismail@hsbcib.com
Kirtan Mehta, CFA
+91 80 3001 3779 kirtanmehta@hsbc.co.in
Puneet Gulati
+91 22 681235 puneetgulati@hsbc.co.in
Real Estate
CEEMEA
Levent Bayar
Analyst
+90 212 376 46 17 leventbayar@hsbc.com.tr